Eleven Ohio credit unions have banded together to offer a cheaper alternative to payday loans, and more from throughout the country are expected to join them.
Last month the participating credit unions each contributed up to $15,000 to form Credit Union Outreach Solutions Inc., a credit union service organization that will guarantee any losses from a new short-term loan program the credit unions are offering their members.
With an interest rate of 18%, a member who takes 12 advances of $250 each in a year incurs a total cost of about $78. In contrast, the borrower would pay more than four times that amount - up to $360 - for 12 similar loans from a payday lender, says Bill Burke, the president and chief executive of the $139 million-asset Day Air Credit Union in Kettering, Ohio, and the new organization's board chairman.
"We believe our members who are using payday lenders are getting charged an awful lot, and we wanted to save them money," Mr. Burke said.
Under the program, called StretchPay, a member pays an annual fee of $35 for a revolving $250 short-term loan and $70 for a similar $500 loan. The borrower must pay the entire balance of the loan within 30 days before taking a new advance.
These types of short-term loans are not new, but this is the first time either credit unions or banks have joined forces to create an entity to guarantee the loans, he said.
The credit unions use the interest rates charged on the loans to pay their own operating costs, but the annual fees are put into a guarantee fund held by Credit Union Outreach Solutions to cover any losses from defaults. Mr. Burke said the model should attract more credit unions, because they would not have to absorb losses themselves. About a dozen more credit unions in Ohio and other states have expressed an interest in participating.
Members who take out the loans are offered free financial counseling, Mr. Burke said. "Our goal is to move people away from living from paycheck to paycheck," he said.
Jean Ann Fox, the Consumer Federation of America's director of consumer protection, said that though the advocacy group has not had a chance to formally study StretchPay, it sounds like a good alternative to payday loans.
"We're always glad to have banks and credit unions go to market with small loans that have a reasonable interest rate and affordable repayment terms," Ms. Fox said.
Robert L. Palmer, the president and CEO of the Community Bankers Association of Ohio, said StretchPay will compete with the short-term loan products that many Ohio banks offer. But he said banks have an advantage because most do not charge annual fees for such revolving loans.
Mr. Burke responded that banks make short-term loans only to customers who qualify after credit scoring; credit unions making StretchPay loans require only that members in good standing have six months of verifiable income.
Many of these members would not qualify for bank loans, and hence would most likely resort to payday loans - with fees much higher than StretchPay's.
Day Air Credit Union has actually been offering such loans for three years, Mr. Burke said. It doesn't make money on them, but it doesn't lose any, either, he said.
"We're really just doing this as a service to our members," he said.
Still, Day Air and the other credit unions offering StretchPay loans are hoping that members - after financial counseling - will turn into savers and borrowers of more lucrative loans that the credit unions offer.
The Ohio Credit Union League and the University of Dayton helped develop the StretchPay program and form Credit Union Outreach Solutions.
